R O C K E T H U B

I M P L E M E N T A T I O N O F C R O W D F U N D I N G

B U I L D I N G O N T I T L E I I I O F T H E J O B S A C T

R E S P O N S E T O P R O P O S E D R U L E S

( R e l e a s e N o . 3 3 - 9 4 7 0 )

W H I T E P A P E R 3 . 0

F E B R U A R Y 2 0 1 4

R O C K E T H U B . C O M

http:ROCKETHUB.COM

 

 

Principal Authors

Alon Hillel-Tuch Jed Cohen RocketHub RocketHub

This whitepaper was drafted with the assistance of Aron Izower and Andrew Silver of Reed Smith LLP.

 

 

     

 

     

   

   

     

     

     

     

     

     

     

     

     

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

TABLE OF CONTENTS

Page

Introduction............................................................................................................................... .................. 1

Overview of Responses to the Commission’s Request for Comments.................................................... 3

Ongoing Reporting Requirements............................................................................................................ 3

Ability of Intermediaries to Define and Police their Platforms ............................................................... 4

Issuer’s Ability to Restrict the Offer ........................................................................................................ 5

Promotion by the Portal ........................................................................................................................... 6

Promotion by the Issuer ........................................................................................................................... 6

Liability of Funding Portals ..................................................................................................................... 7

Financial Statements ............................................................................................................................... . 8

Rescission Period ............................................................................................................................... .... 11

Intermediary’s Ability to Provide Ancillary Services ............................................................................ 12

Specific Responses to the Commission’s Request for Comments ......................................................... 14

II.A.1: Limitation on Capital Raised ............................................................................................... 14

II.A.2: Investment Limitation........................................................................................................... 16

II.A.3: Transaction Conducted Through an Intermediary............................................................ 19

II.A.4: Exclusion of Certain Issuers from Eligibility under Section 4(a)(6) ................................. 20

II.B.1: Disclosure Requirements ...................................................................................................... 22

II.B.2: Ongoing Reporting Requirements ....................................................................................... 42

II.B.3: Form C and Filing Requirements ........................................................................................ 46

II.B.4: Prohibition on Advertising Terms of the Offering ............................................................. 47

II.B.5: Compensation of Persons Promoting the Offering............................................................. 49

II.B.6: Other Issuer Requirements .................................................................................................. 51

II.C.1: Brokers and Funding Portals ............................................................................................... 54

II.C.2: Requirements and Prohibitions ........................................................................................... 55

II.C.3: Measure to Reduce Risk of Fraud ....................................................................................... 58

II.C.4: Account Opening ................................................................................................................... 63

II.C.5: Requirements with Respect to Transactions....................................................................... 66

II.C.6: Completion of Offerings, Cancellations and Reconfirmations.......................................... 74

II.C.7: Payments to Third Parties .................................................................................................... 74

II.D.1: Registration Requirement .................................................................................................... 75

II.D.2: Exemption from Broker-Dealer Registration ..................................................................... 76

 

 

       

       

     

     

     

     

 

 

II.D.3: Safe Harbor for Certain Activities....................................................................................... 76

VI: Initial Regulatory Flexibility Act Analysis .......................................................................... 80

Appendix ............................................................................................................................... ..................... 82

I – Definitions ............................................................................................................................... ........ 82

II – Diagrams & Tables ....................................................................................................................... 82

III – Issuer Cost Calculations ............................................................................................................. 83

 

  

                                                                                                                 

Introduction

RocketHub acknowledges the Commission’s diligence and effort in producing the proposed regulations. We believe, however, that the proposed rules fail to address the realities of operating a crowdfunding Portal,1 and fail to respond to the needs of an issuer considering a Section 4(a)(6) offering. The proposed rules need to be more cost-sensitive, less burdensome and more realistic to permit the development of a vibrant, sustainable, and scalable securities crowdfunding market, as envisioned by the JOBS Act.

Through this response paper, RocketHub argues that the proposed regulations are cumbersome and expensive. We believe the Commission has not taken full advantage of the opportunity provided by the JOBS Act to craft rules for a low-cost, web-based offering exemption and has instead imported expensive concepts from traditional regulatory frameworks. This is amply demonstrated by Rockethub’s cost-analysis of the filing and audit requirements,2, 3 which establish an upfront cost that is too high for small businesses to accept. These proposed regulations also require businesses to engage an excessive amount of outside expert advice, which is not appropriate for the size of the market. Furthermore, Portals are saddled with misplaced liability, hindering their ability to operate in the market alongside other intermediaries.

RocketHub is concerned that the Commission too frequently relies on traditional concepts, instead of addressing and exploring the modern social media marketplace that underpins this new market. The complexity of the proposed regulations (585 pages) will increase costs associated with compliance, and discourage issuances. One reason that crowdfunding has become so popular is its low barrier to entry. Project leaders can leverage RocketHub’s system to test the market, see if there is support for their ideas, and use that information to inform their decisions on how to move forward. Under the proposed rules, issuers will be faced with significant upfront costs, and the real possibility of a failed offering leaving them in a worse position than before the attempt.

In this whitepaper RocketHub has endeavored to bring operational insight, and an experienced crowdfunding & technology industry perspective to the discussion of the proposed rules. RocketHub believes that this perspective will benefit the Commission, allowing them to create regulation that will provide adequate protection of the consumer, and opportunity to the issuer. While we will continue to push for legislation that will reduce costs to the market, we urge the Commission to reexamine its approach in implementing the crowdfunding provisions of the JOBS Act.

1 Funding Portal as defined in section 3(a)(80) of the Securities Exchange Act of 1934, as amended. 2 See Appendix I, II and III 3 See page 8

1

 

  

                                                                                     

                              

                                  

About RocketHub: RocketHub is one of the world’s largest, and most successful, perks-based crowdfunding platforms, and the only established crowdfunding platform that has taken an active role in the rule making process surrounding the JOBS Act. Through the release of two prior whitepapers,4, 5

Congressional testimony,6 and numerous meetings with both the Commission7 and FINRA,8

RocketHub has offered expert opinion on how the investment-based crowdfunding market will function, and data and insight into the user behavior that has made crowdfunding a social phenomenon. RocketHub firmly believes that all parties involved are making legitimate efforts to construct a functional regulatory framework that will revitalize the US economy, encourage job creation, and foster domestic innovation.

4 RocketHub, Regulation of Crowdfunding: Building on the Jumpstart Our Business Startups Act, http://www.sec.gov/comments/jobs‐title‐iii/jobstitleiii‐39.pdf, May 2012 5 RocketHub, Implementation of Crowdfunding: Building on Title III of the JOBS Act, http://www.sec.gov/comments/jobs‐title‐iii/jobstitleiii‐179.pdf, October 2012 6 http://oversight.house.gov/wp‐content/uploads/2012/06/6‐26‐12‐TARP‐Hillel‐Tuch.pdf7 http://www.sec.gov/comments/jobs‐title‐iii/jobs‐title‐iii.shtml#meetings8 RocketHub, Module XVII of FINRA’s Capital Markets Series, September 17, 2013

2

http://www.sec.gov/comments/jobs-title-iii/jobs-title-iii.shtml#meetingshttp://oversight.house.gov/wp-content/uploads/2012/06/6-26-12-TARP-Hillel-Tuch.pdfhttp://www.sec.gov/comments/jobs-title-iii/jobstitleiii-179.pdfhttp://www.sec.gov/comments/jobs-title-iii/jobstitleiii-39.pdf

 

  

Overview of Responses to the Commission’s Request for Comments

Ongoing Reporting Requirements

This is in response to the following requests for comment: 17, 18, 24, 25, 26, 29, 30, 31, 32, 33, 34, 36, 37, 38, 41, 42, 72, 73, 74, 75, 79, 84, 92, 93, 94, 96.

As currently proposed, the initial and ongoing reporting requirements for issuers impose unnecessary costs and complexity, which fail to take advantage of the web-based nature of crowdfunding, and are not supported by the JOBS Act.

The requirement for issuers to file a Form C with the SEC prior to making an offering on a Portal imposes an up-front cost on issuers with no benefit to investors. The up-front cost is that issuers need to incur the time and expense of completing the Form C. This is especially troublesome for issuers who are ultimately not successful in completing their capital raise. The Form C, however, is neither reviewed, nor declared effective by the SEC. As a result, there is no countervailing benefit to investors in terms of rule compliance or anti-fraud. Instead, all potential investors in the offering will be viewing the materials that are posted and available on the Portal’s site. A better solution would be to only require a Form C be filed upon the completion of the offer. This “final” Form C would include the final versions of materials disclosed to investors during the offering process. The “final” Form C should be filed exclusively electronically, and should allow for reference to materials on the Portal’s website (if the Portal has agreed to keep such information available).

The requirements for issuers to file “Form C-U” progress updates are similarly flawed. If an offering is unsuccessful, the requirement that issuers make a filing upon reaching the 50% commitment threshold is irrelevant. If an offering is successful, the requirement that issuers make a filing upon reaching the 50% commitment threshold is useless because the issuer will have disclosed reaching 100% of funding. These progress updates also fail to account for (i) the various lengths of offering periods, (ii) the nature of the timing of funding commitments (which may all come in at the end of the funding period, making interim filings irrelevant), and (iii) the visibility of funding status to all potential investors on the Portal’s website. As a result, these progress reports (which are not required for other types of offerings) add a layer of useless regulation and cost on small business issuers.

The proposed rules seek to implement a pre-offering filing requirement with subsequent amendments (analogous to a registered offering) which is inappropriate for an exempt offering that utilizes social media and web-based communications. All potential crowdfunding investors have access to all information posted on the funding Portal’s website, either by the issuer or by other potential investors contemplating an investment. The issuer has the opportunity to engage in public discussion with the investors, and the investors have the opportunity to raise concerns and request additional information. We do not expect that many (or any) investors will look to

3

 

  

the EDGAR system over having the same information provided (and discussed) on the funding Portal’s website. The rules as proposed fail to integrate this reality in their approach and as a result, impose unnecessary filing requirements.

While such filings may serve certain statistical compilation purposes, they do not provide a direct benefit to investors, and impose real costs on issuers. As such, we urge the SEC to revisit their approach in providing information to investors and reduce the filing requirements.

Instead, the Commission should set minimum reporting requirements with the understanding that such requirements can be enhanced or adjusted through collective decisions by issuers and investors. If too many disclosures, filings, reports, and forms are required, issuers will face unnecessary hurdles and costs. Issuers would also be better positioned to serve their investors’ interests if not distracted from successfully building and running their enterprises.

The Commission should generally rely on investors to ensure adequate disclosure through the initial offering materials. As discussed throughout, if the investors do not feel that sufficient information has been disclosed, they are free to simply not invest or request further information. The crowd will be able to compel the issuer to make the requested disclosure in order to attract or retain investors. The Commission should also specify the material changes that would trigger an issuer’s responsibility to disclose such information. The Commission should provide a list similar to that accompanying Form 8-K; however, the list should be modified to appropriately acknowledge the difference between public and private companies, and the different types of material events that early growth companies experience. Issuers would then be able to easily identify and comply with their reporting obligations. While investors would then have access to this information, they would also retain the ability to request disclosure of additional material changes from the issuer. Rather than create a rigid, one-size-fits-all solution, this would enable investors to determine what changes they deem material to their particular investment.

Material changes should be disclosed by the issuer on the Portal, where they can be used by investors and potential investors to make informed decisions. This method of disclosure will also permit issuers to use various media to communicate with investors (e.g., written statements, video presentations, etc.).

Ability of Intermediaries to Define and Police their Platforms

This is in response to the following requests for comment: 15, 103, 104, 113, 114, 115, 116, 133, 134, 135, 166, 167, 168, 169, 170, 219, 220, 221, 222, 223.

Intermediaries require the ability to define their market position and “police” their platform for inappropriate use. To do so, intermediaries must be allowed to determine the content that will

4

 

  

appear on their platforms and be allowed to select certain issuers (and exclude others) based on predefined criteria. Such criteria could include, but would not be limited to:

Issuer’s industry (i.e., permitting industry specific intermediaries); Type of securities being offered (i.e., permitting offering term specific platforms); Size of offering; Geographic location of issuer’s business; Stage and operating history of company; Valuation methodology; and Securities and background check results (i.e., permitting intermediaries to impose higher

standards than the Commission).

Regulation should likewise not interfere with a Portal’s ability to use its discretion to accept or reject certain campaigns. Similar to specialty stores, Portals may specialize by industry, size of the offering, geography, and investor type or issuer history. This may improve disclosure and investor protection, as (i) investors may more easily compare investment opportunities in similar businesses (and educate themselves) on a Portal that specializes in that industry, (ii) competition may drive market norms (Portals or investors may decide that “idea only” companies are too risky and not worth their attention, or that such companies provide the only attractive returns), and (iii) Portals may develop special knowledge regarding the industry or class of issuer which may help reduce fraud and improve disclosure to investors. Such decisions should not be interpreted as an endorsement of individual campaigns or provision of investment advice, and should not be subject to intrusive regulation.

Portals must also maintain the ability to “police” their own platforms for inappropriate content. For example, nearly every web-based business, which allows users to post comments or content, moderates the forums where content is posted. Intermediaries must be allowed to remove content that is unlawful, harmful, threatening, abusive, harassing, defamatory, vulgar, obscene, invasive of another’s privacy, hateful, or racially, ethnically or otherwise objectionable. Intermediaries must also be allowed to suspend or ban users who repeatedly abuse the system.

Issuer’s Ability to Restrict the Offer

This is in response to the following request for comment: 15.

An issuer should be allowed to determine the nature of its own offering by restricting the investors it chooses to accept. For example, an issuer my wish to leverage Section 4(a)(6) specifically to formalize a “friends and family” investment round. To facilitate such an offering, the issuer should be allowed to make the offering “invite only” by delivering invitations to a specified list of perspective investors while restricting all others from viewing the offering.

5

 

  

Issuers should be permitted to choose investors based on specific criteria, such as the size of the required investment, the investor’s geographic location, or any other legal, non-discriminatory metric. Issuers should also be permitted to approve or reject individual investors before the offering is formally closed. Receipt of an indication that a perspective investor would like to invest in the issuer should not obligate the issuer to accept that investor. As long as the issuer’s justification for rejecting an investor is not discriminatory in nature, issuers should not be obligated to explain such decisions to investors, intermediaries, the SRO, or the Commission.

This approach is consistent with basic legal principles and other private placements in which the issuer has the right to determine to whom to make offers to participate.

Promotion by the Portal

This is in response to the following requests for comment: 99, 100, 101, 187, 216, 217, 218, 220, 223.

Portals should be permitted to advertise to: (i) draw interest to their sites generally, and (ii) encourage issuers to fund through them. Portals should be barred from language that implicates the level of risk involved in the investment or the overall quality of the investment opportunity. Nevertheless, if a Portal chooses to feature or highlight certain offerings based on its discretion or the use of specific metrics (e.g. topic, press, or momentum), such decisions should not be viewed by the Commission as investment advice, a recommendation, or a solicitation. Portals need the ability to feature campaigns to compete with other Portals.

Portals should be barred from soliciting investments for any specific campaign by providing offering details outside of the Portal itself. However, Portals should be allowed to advertise more generally, as well as highlight ongoing offerings through various communication channels. Additionally, like other businesses, Portals may have staff dedicated to handling business development and marketing initiatives. Such standard business practices should not be limited.

Promotion by the Issuer

This is in response to the following requests for comment: 97, 100, 101, 103, 105, 106, 108.

There is a clear distinction between an issuer hiring an individual or entity for promotion and more standard web-based advertising, such as Google ads, Facebook ads, or sponsored tweats. When an issuer hires an individual or entity for promotion, investors may not be aware of the commercial relationship between the parties. The Commission should not enact rules that may

6

 

  

interfere with promotional compensation, but should rather require simple disclosure of a commercial relationship where it would not otherwise be apparent to investors.

Notice to investors can be achieved by highlighting comments or postings by promoters or affiliates of the issuer. To avoid confusion, the Commission must also provide clear definitions regarding what constitutes compensation and payment for promotion. A simple disclosure by the issuer on its offering page that compensation was provided to select promoters should suffice. The Commission should also supply examples of the application of these definitions in major social media outlets (e.g., the use of hashtags on Twitter), where traditional recognition of a commercial relationship may not be possible.

We anticipate that most promotions will be limited to notices that direct investors to the intermediary’s platform, which are not prohibited by the proposed rules. We also anticipate that when investors or potential investors have questions or comments for an issuer, they may publicly tweet an issuer or post a question on the issuer’s Facebook account. If the question pertains to the offering, the issuer should be able to respond to the investor with a link directing the investor to the public communication channel on the intermediary’s platform. While the link the issuer provides could technically be considered a communication, we believe any communication directing an investor to the compliant communication offered through the Portal should be permitted.

Liability of Funding Portals

This is in response to the following requests for comment: 129, 130, 131, 134.

We disagree with the SEC’s commentary in the proposing release that, “it appears likely that intermediaries, including funding Portals, would be considered issuers for purposes of [liability under Section 4A(c)]”. In this context it would be akin to holding a securities exchange liable for fraud committed by an issuer listed on such exchange.

To resolve any dispute, however, we encourage the SEC to adopt a clear position and safe-harbor that acknowledges that a Portal providing the services permitted under applicable rules is not an “issuer” for purposes of the Securities Act. This position is consistent with the historical treatment of securities marketplaces and the common (and statutory) understanding of the term “issuer”. Failure to address this provision exposes Portals to misplaced liability and threatens the fundamental economics of the crowdfunding marketplace.

While funding Portals can perform basic background checks on the issuer and certain disclosed equity holders, they have neither the resources, nor the expertise to examine statements to determine truth (or detect omissions). Issuers will make statements regarding business plans,

7

 

  

                                                                                                                                

affiliate transactions and contracts which Portals will have no ability to verify. Exposing the Portals to liability as an issuer requires that the Portal conduct diligence as if it were the issuer. As the Portal does not receive the economic benefit of the issuer, this burdens the Portal with risks that are not commensurate with the reward.

Investors should be informed of the explicit and limited steps to police fraud that the Portal has undertaken, and acknowledge that their recourse for misstatements lies solely against the issuer of the securities. Investors will instead be protected through disclosure regarding the risks of investing and the receipt of adequate disclosure from the issuer. Investors will have the opportunity to perform diligence and pose questions to the issuer. Each investor will then have the ability to review the issuer’s responses, as well as feedback on those responses from other potential investors. The nature of crowdfunding encourages disclosure of relevant information through the negotiation and agreement that will occur between the issuer and investors.

Viewing Portals as issuers (or underwriters) misstates their role in the marketplace and threatens to create economic disincentives so extreme as to eliminate any possibility of non-Broker9 / Dealer10 Portals operating under the proposed rules.

Financial Statements

This section is in response to the following requests for comment: 12, 18, 19, 20, 29, 31-33, 47-48, 50-58, 60-62, 64-66, 69, 71, 80, 85, 86, 88, 122-127.

After assessing the proposed rules, the dynamics involved in a crowdfunded offering, and the types of issuers most likely to seek to leverage Section 4(a)(6), there appear to be significant costs which are structured in a manner that will jeopardize the viability of the potential market for a crowdfunded offerings. Since there is no guarantee of an offering’s success, excessive up-front costs will penalize issuers and create an issuer oriented risk-exposure to debt (due to regulatory compliance costs) that may cripple the very small businesses the JOBS Act was designed to support.

9 Broker as defined in Section Section 3(4) of the Securities Exchange Act of 1934, as amended.10 Dealer as defined in Section Section 3(a)(5) of the Securities Exchange Act of 1934, as amended.

8

 

  

                                                                                       

                                                 

Figure 1.111, 12

Offerings of $100,000 or less

Offerings of more than $100,000, but

not more than $500,000

Offerings of more than $500,000

Compensation to the intermediary. A $2,500 - $7,500 $15,000 - $45,000 $37,500 - $112,500

Costs per issuer for obtaining EDGAR access codes on Form ID. B $60 $60 $60

Costs per issuer for preparation and filing of Form C for each offering. C $6,000 $6,000 $6,000

Costs per issuer for preparation and filing of the progress updates on Form C-U. D $400 $400 $400

Costs per issuer for preparation and filing of annual report on Form C-AR. E $4,000 $4,000 $4,000

Costs for annual review or audit of financial statements per issuer. F Not Required $14,350 $28,700

Costs per issuer for preparation and filing of Form C-TR to terminate reporting. G $600 $600 $600

Figure 1.1 can be used to model issuers’ potential cost structures. An issuer conducting an offering to raise $501,000 would have to allocate 21.15%13 of the total amount raised in costs, with $34,760 in potential up-front costs.14 On a $101,000 raise, if one year of accountant-reviewed financials is required, the predicted costs amount to 40.01%15 of the total raise, with at least $20,410 in anticipated up-front costs.16 This percentage increases to 54.22% if two years’ worth of accountant reviewed financial statements are required.17 Given these proposed rules, more funds would be spent on compliance costs than retained by the issuer.

These calculations do not include additional costs that will be imposed on issuers and Portals to ensure compliance. Therefore, these figures understate the true cost of the proposed rules.

11 Securities and Exchange Commission, Release Nos. 33‐9470; 34‐70741; File No. S7‐09‐13, Pg. 358, http://www.sec.gov/rules/proposed/2013/33‐9470.pdf, October 23, 2013 12 See Appendix I 13 See Appendix III.A 14 See Appendix III.F 15 See Appendix III.C 16 See Appendix III.G 17 See Appendix III.C

9

http://www.sec.gov/rules/proposed/2013/33-9470.pdfhttp:required.17http:costs.16http:costs.14

 

  

                                                                                                      

                                                                            

                                                              

  

  

 

   

       

Figure 1.2

32.12

18.56

54.22

27.9

16.95

21.15

0

10

20

30

40

50

60

50,000 250,000 450,000 650,000 850,000

Cost

as p

ercentage of

Raise

Amount Raised

Cost Breakdown (%)

Cost 1‐Year (%) Cost 2‐year (%)

Figure 1.2 demonstrates that the proposed rules create resistance points in the amount being raised.18 This structure creates a disincentive to raise amounts in excess of the resistance point, unless an issuer can raise considerably more and mitigate the cost. This could force increased dilution or a larger capitalization table than desired. Although some aspects of the resistance points can only be reduced through legislative change, a considerable up-front cost component imposed by the Commission can be avoided. The bulk of these upfront costs are associated with preparing filings for the Commission, obtaining an EDGAR access code, and using the proposed Form C.19

RocketHub believes that the Financial Condition of Issuer requirements are excessive in cost and misguided in intent. While subsection Sec.302(b)/Sec4A.(b)(1)(D)(i)(II) requires issuers to provide certified financial statements, an early stage company may not have historical financial statements to provide. “Financial statements” should therefore be interpreted to mean “historical financial statements” only for periods that the issuer has been in existence. Moreover, not all issuers will have historical financial information that can be audited, and the prohibitively

18 These points are $100,000 & $500,000, respectively. This becomes very apparent for an issuance of less than $100,000. Using the function 19 ݔܽ ݕܾ ൌ ,ൌ 0 ܿ ݕ

13,560. When the slope of the linear line is marginal (0.05), but the y‐intercept point (when amount ݔ0.05raised [x] is equal to zero) is a large portion of total range of (0 ≤ x ≥ 100,000) this means that the up‐front cost component is the largest influencer. At the high‐end of the range, when x = 100,000, up‐front cost is equal to 13.56% of the total amount raised, which is the best case scenario.

10

http:raised.18

 

  

                                                                                                                                                                                        

                                                                                                                          

expensive nature of audits contradicts the spirit of the Act. Regardless of historical financials, the requirements when applied to offerings of less than $1,000,000 highlight that the funds appropriation ratios are excessive.

Sec.302(b)/Sec4A.(b)(1)(D)(iii) explicitly permits the Commission to adjust the target offering amount where audited financials are required. As audited financials are generally not required for angel investments or venture capital investments of this size (largely due to the cost incentives described above), the target offering amount should be raised to an amount in excess of $1,000,000. This will permit elimination of the audit component of the proposed requirements for offerings of less than $1,000,000.

Request for Comment 58 specifically addresses the ability to require issuers to provide financial statements that are certified by the principal executive officer to be true and complete in all material respects for issuers looking to raise more than $100,000 but less than $500,000. RocketHub fully supports certification by the principal executive officer in lieu of the costly accounting requirements, though we recognize that legislative support may be necessary to accomplish this. The ability to self-certify would help reduce up-front costs. Furthermore, a serious reduction in the unnecessary rate of reporting through Form-C would further reduce the up-front costs, making Section 4(a)(6) viable for the market the JOBS Act is intended to support.

Rescission Period

This is in response to the following requests for comment: 34, 171-172, 182-186.

We support the Commission’s position on not prescribing how oversubscribed offerings would be allocated, as well as the simple disclosure of the target offering amount and oversubscription cap. However, the Commission has included proposed rules on the process to cancel commitments without requesting comment. RocketHub has serious concerns with the process as proposed. The Commission’s proposal leaves investors open to considerable risk of “pump & rescind” schemes.20 It also leaves issuers at risk of “short fall” situations.21 Investors must have the ability to cancel their commitments within a reasonable time limit. However, as provided in the proposed rules, the right to rescind exposes both the investor and issuer to specific types of

20 Pump & Rescind: An unscrupulous issuer could have fake investors “pump up” the campaign by committing large dollar amounts up‐front, in order to create the appearance of momentum, thereby attracting other investors. According to the proposed rules, at the end of the offering, those initial investors could slowly “rescind” their investments, leaving only the new investors committed. This amounts to fraudulent promotion through faux‐investing, and should not be permitted.21 Short Fall: Investors who are allowed to rescind their commitments to invest, after the campaign has reached the target amount, may cause the campaign to fall short of the target amount. This short fall may jeopardize the entire offering if the issuer does not have enough time to replace the lost investors before the campaign expires.

11

http:situations.21http:schemes.20

 

  

fraud and risk, and the proposed rules methodology unnecessarily exceeds the JOBS Act’s requirements.

RocketHub suggests that once an investor expresses an intent to invest, the investor’s investment should be placed in a “pending” state for 24-hours. After that 24-hour rescission period expires, the investor’s funds should transition from “pending” to “committed,” and should be held in escrow until transferred to the issuer. Notices of commitment can be submitted to investors after their rescission period has ended, and a secondary notice can be submitted to investors at the completion of the issuance. If the offering does not reach its funding target before the campaign deadline, the investor’s funds should be released from escrow and returned to the investor.

As described in the proposed regulations, the Commission allows for a rescission period that is as long as the offering itself. This does not reflect the dynamics of crowdfunding. As Sec.302(b)/Sec4A.(a)(6) requires a minimum offering period of 21 days, the investor should have enough time to review the investment opportunity before investing, rendering a longer rescission period unnecessary. A short rescission period will protect investors from “pump & rescind” schemes and minimize an issuer’s exposure to the risk of “short fall.”

Intermediary’s Ability to Provide Ancillary Services

This is in response to the following requests for comment: 76, 77, 78, 79, 80, 81, 82, 94, 96, 102, 105, 106, 107, 108, 114, 116, 128, 140, 146, 187, 226.

An intermediary may initially seem to serve solely as the platform on which an issuer’s offering appears. In actuality, the intermediary creates the user experience and the user interface for both issuers and investors. The intermediary also creates the system through which issuers and investors interact with one another and third-party service providers. For example, whether or not a Portal uses a third-party payment service or its own technology, the issuer will perceive them as one and the same.

It would be impractical to have issuers and investors switching between various parties’ software (i.e., EDGAR) in order to complete tasks. Intermediaries, and in particular Portals, are centrally located and will be able to unify the experience for issuers and investors, thereby increasing compliance and oversight.

Examples of services Portals seek to offer include, but are not limited to:

Form-C filing; Form-C update filing; Amendment filing; Additional investor and issuer education;

12

 

  

Direct registration of securities; Allocation and disbursement of funds as appropriate; Assist issuer with corporate structure; Connect issuer and investors with qualified service providers (including lawyers,

accountants, etc.); Assist with and/or directly perform background checks and income verification; Post-issuance investor relations; Financial statement construction; and Copywriting, and video production.

Fundamentally, the crowdfunding market is designed to enable fundraising by issuers that represent idea-only, early stage, and small businesses. These issuers seek to actively engage with investors who have a genuine interest in the success of their businesses, often for reasons that are not limited to a return on investment. This includes family and friends that are connected with the issuers via online and offline social networks. These businesses may not be venture capital ready, or may not be traditionally venture-backable, and their Section 4(a)(6) offerings may be their first exposure to securities regulation. Therefore, allowing Portals to provide the necessary ancillary services will not only facilitate a smooth offering, but also ensure investors and issuers are fully protected, compliant, and informed.

13

 

  

                                                                                       

       

Specific Responses to the Commission’s Request for Comments

II.A.1: Limitation on Capital Raised

1. Should we propose that the $1 million limit be net of fees charged by the intermediary to host the offering on the intermediary’s platform? Why or why not? If so, are there other fees that we should allow issuers to exclude when determining the amount to be raised and whether the issuer has reached the $1 million limit?

2. As described above, we believe that issuers should not have to consider the amounts raised in offerings made pursuant to other exemptions when determining the amount sold during the preceding 12-month period for purposes of the $1 million limit in Section 4(a)(6). Should we require that certain exempt offerings be included in the calculation of the $1 million limit? If so, which types of offerings and why? If not, why not? As noted above, at this time the Commission is not proposing to consider the amounts raised in non-securities- based crowdfunding efforts in calculating the $1 million limit in Section 4(a)(6). Should the Commission propose to require that amounts raised in non-securities-based crowdfunding efforts be included in the calculation of the $1 million limit? Why or why not?

RocketHub agrees with the Commission’s position that the limit on capital raised via Section 4(a)(6) should be calculated based solely on funds raised via that exemption. Other exempt offerings should not be included in the calculation of the $1 million limit, as doing so could severely restrict a business’s ability to leverage this exemption, and defeat the spirit of the legislation. Additionally, we predict that some issuers will opt to leverage multiple exemptions, including Title II of the JOBS Act, and 506(c) offerings under Regulation D.

Section 4(a)(6) establishes a brand new exemption and structure, distinct from other exempt offerings. As compliance with this exemption requires its own costs, RocketHub suggests the $1 million limit should be net of all expenses associated with compliance and facilitation of Section 4(a)(6) issuance. Those expenses include, but are not limited to fillings fees, transfer costs, regulatory costs, background checks, intermediary fees, and other expense incurred within the ordinary course of a Section 4(a)(6) issuance. As proposed, the cost ratio of compliance with a Section 4(a)(6) issuance may be greater than that associated with a Regulation D offering. In order to ensure that the Section 4(a)(6) exemption will be a viable option to issuers, the Commission should allow issuers the opportunity to cover the cost of compliance within the raise. If not, the aggregate limit on capital raised under Section 4(a)(6) would be significantly reduced (based on the Commission’s own calculations22), defeating the spirit of the legislation and significantly limiting its use.

22 Securities and Exchange Commission, Release Nos. 33‐9470; 34‐70741; File No. S7‐09‐13, Pg. 358, http://www.sec.gov/rules/proposed/2013/33‐9470.pdf, October 23, 2013

14

http://www.sec.gov/rules/proposed/2013/33-9470.pdf

 

  

Non-securities based crowdfunding should similarly be excluded from the calculation of the Section 4(a)(6) $1 million limit. The spirit of the legislation is to offer a new avenue for access to capital. If the Commission were to include non-securities based crowdfunding in the calculation, companies with a track record of success and support from the crowd would be unduly restricted from access to capital in a way that is neither intended nor implied by the legislation. Furthermore, non-securities based crowdfunding encompasses many different types of transactions: charitable giving, pre-sales, exchange, in-kind donations, etc. Effectively establishing rules regarding how each of those types of transactions should be included within Section 4(a)(6) $1 million limit calculation is impractical, may hamper the existing market, and would place a severe burden on the issuer in order to maintain compliance.

3. As described above, we believe that offerings made in reliance on Section 4(a)(6) should not necessarily be integrated with other exempt offerings if the conditions to the applicable exemptions are met. How would an alternative interpretation affect the utility of crowdfunding as a capital raising mechanism? Are there circumstances under which other exempt offers should be integrated with an offer made in reliance on Section 4(a)(6)? If so, what are those circumstances? Should we prohibit an issuer from concurrently offering securities in reliance on Section 4(a)(6) and another exemption? Why or why not? Should we prohibit an issuer from offering securities in reliance on Section 4(a)(6) within a specified period of time after or concurrently with a Rule 506(c) offering under Regulation D involving general solicitation? Why or why not? Should we prohibit an issuer from using general solicitation or general advertising under Rule 506(c) in a manner that is intended, or could reasonably be expected, to condition the market for a Section 4(a)(6) offering or generate referrals to a crowdfunding intermediary? Why or why not? Should issuers that began an offering under Section 4(a)(6) be permitted to convert the offering to a Rule 506(c) offering? Why or why not?

As noted above, we predict that some issuers will opt to leverage multiple exemptions, including Section 4(a)(6), Title II of the JOBS Act, and Rule 506(c) under Regulation D, either concurrently, or within a short time frame. The Commission should not mandate that multiple offerings be integrated.

The Commission should not prohibit an issuer from issuing a Rule 506(c) offering under regulation D, either concurrently, or within a particular time from a Section 4(a)(6) offering. Nor should the Commission prohibit an issuer from using general solicitation or advertising under Rule 506(c) in a manner that is expected to condition the market for a Section 4(a)(6) offering, or generate referrals to a crowdfunding intermediary. RocketHub expects that Section 4(a)(6) offerings will occur at the initial stages of an issuer’s capital needs, with a Rule 506(c) offering under Regulation D to follow, targeting accredited investors. Prohibiting an issuer from

15

 

  

leveraging one exemption or another could restrict the issuer’s access to capital, and discourage accredited investors from separately investing amounts in excess of the Section 4(a)(6) investment limits.

Issuers that have an actively running offering under Section 4(a)(6) should not be permitted to convert the offering to a Rule 506(c) offering. The active Section 4(a)(6) offering should first be withdrawn (or allowed to expire). Actively running offerings under Section 4(a)(6) will have already been made public, and are designed for a different market than Rule 506(c). Conversion of an active offering could create confusion for both the investors and the Portal.

II.A.2: Investment Limitation

6. While we acknowledge that there is ambiguity in the statutory language and there is some comment regarding a contrary reading, we believe that the appropriate approach to the investment limitations in Section 4(a)(6)(B) is to provide for an overall investment limit of $100,000 and, within that limit, to provide for a “greater of” limitation based on an investor’s annual income or net worth. In light of ambiguity in the statutory language, we are specifically asking for comment as to the question of whether we should instead require investors to calculate the investment limitation based on the investor’s annual income or net worth at the five percent threshold of Section 4(a)(6)(B)(i) if either annual income or net worth is less than $100,000? Similarly, for those investors falling within the Section 4(a)(6)(B)(i) framework, should we require them to calculate the five percent investment limit based on the lower of annual income or net worth? Should we require the same for the calculation of the 10 percent investment limit within the Section 4(a)(6)(B)(ii) framework? If we were to pursue any of these calculations, would we unnecessarily impede capital formation?

7. The statute does not address how joint annual income or joint net worth should be treated for purposes of the investment limit calculation. The proposed rules clarify that annual income and net worth may be calculated jointly with the annual income and net worth of the investor’s spouse. Is this approach appropriate? Should we distinguish between annual income and net worth and allow only one or the other to be calculated jointly for purposes of calculating the investment limit? Why or why not? Should the investment limit be calculated differently if it is based on the spouses’ joint income, rather than each spouse’s annual income? Why or why not?

With respect to the issues raised in request for comment 6, we agree with the Commission’s position in the proposed rules.

With regards to the treatment of joint income or joint net worth, RocketHub suggests the Commission refer to the structure established by the Internal Revenue Service (IRS). The IRS

16

 

  

                                                                                                                 

     

has established five types of filling statuses: Single, Married Filing Jointly, Married Filing Separately, Qualifying Widow(er) With Dependent Child, and Head of Household.23 We recommend the Commission follow this established classification system, which would allow for the use of joint income or joint net worth of spouses when calculating the investor’s annual limit.

8. We are proposing to permit an issuer to rely on the efforts that an intermediary takes in order to determine that the aggregate amount of securities purchased by an investor will not cause the investor to exceed the investor limits, provided that the issuer does not have knowledge that the investor had exceeded, or would exceed, the investor limits as a result of purchasing securities in the issuer’s offering. Is this approach appropriate? Why or why not? Should an issuer be required to obtain a written representation from the investor that the investor has not and will not exceed the limit by purchasing from the issuer? Why or why not?

The issuer must be allowed to rely on the best efforts of the intermediary to enforce the investor’s annual limit. The issuer may not have the expertise or information necessary to determine the aggregate amount of securities purchased by an investor under Section 4(a)(6), or if the purchase will cause the investor to exceed that investor’s annual limit. Through its user interface, the Portal should be able to gather the required information. All efforts made by the Portal should be considered to be best efforts, and should not imply liability is accepted by the Portal. Requiring written representation from the investor is a logical suggestion if, and only if, that written representation can be made by digital means through the intermediary platform used. RocketHub strongly recommends the Commission consider structuring an appropriate safe harbor for intermediaries as well as a form of due diligence defense for Portals.24

RocketHub discusses this issue at length, from the operational perspective of a Portal, in its second white-paper, “Implementation Of Crowdfunding: Building On Title III Of The JOBS Act.”25 Requiring Portals to share information on investors, in order to police these requirements would be difficult, costly, and increase the risk of exposure of confidential information. As such relying on self-certification will ensure a reduction in both cost and the risk of the exposure of confidential information.

9. Should institutional and accredited investors be subject to the investment limits, as proposed? Why or why not? Should we adopt rules providing for another crowdfunding exemption with a higher investment limit for institutional and accredited investors? If so, how high should the limit be? Are there categories of

23 http://www.irs.gov/pub/irs‐pdf/p501.pdf 24 For further discussion see our response to questions 216‐230 in Section II.D.3. 25 RocketHub, Implementation of Crowdfunding: Building on Title III of the JOBS Act, http://www.sec.gov/comments/jobs‐title‐iii/jobstitleiii‐179.pdf, October 2012

17

http://www.sec.gov/comments/jobs-title-iii/jobstitleiii-179.pdfhttp://www.irs.gov/pub/irs-pdf/p501.pdfhttp:Portals.24http:Household.23

 

  

persons that should not be subject to the investment limits? If yes, please identify those categories of persons. If the offering amount for an offering made in reliance on Section 4(a)(6) is not aggregated with the offering amount for a concurrent offering made pursuant to another exemption, as proposed, is it necessary to exclude institutional and accredited investors from the investment limits since they would be able to invest pursuant to another exemption in excess of the investment limits in Section 4(a)(6)?

Institutional and accredited investors should not be subject to the annual investment limits under Section 4(a)(6) offerings. RocketHub supports an interpretation of the investment limits as pertaining to unaccredited investors only. The financial markets (and other SEC rules) recognize accredited investors to be sophisticated investors, that not only have a greater understanding of the risks involved in making a financial investment, but also are less likely to be significantly impacted by poor investment decisions.

10. Should we adopt rules providing for another crowdfunding exemption with different investment limits (e.g., an exemption with a $250 investment limit and fewer issuer requirements), as one commenter suggested, or apply different requirements with respect to individual investments under a certain amount, such as $500, as another commenter suggested? Why or why not? If so, should the requirements for issuers and intermediaries also change? What investment limits and requirements would be appropriate? Would adopting such an exemption be consistent with the purposes of Section 4(a)(6)?

11. Should we consider additional investment limits on transactions made in reliance on Section 4(a)(6) where the purchaser’s annual income and net worth are both below a particular threshold? If so, what should such threshold be and why?

RocketHub supports efforts to reduce costs to issuers, and investors, by exempting investors who make small investments, or who have adequate financial resources, from complex regulation. We believe the current investment limits are too stringent, and the issuer requirements are already excessive.

While some legislative support is necessary, RocketHub believes most recommendations are attainable within the structure and intent of the JOBS Act, and therefore, we do not see the need to craft an alternate independent crowdfunding exemption. The Commission should merely provide exemption from issuer restrictions under Section 4 (a)(6) for issuers willing to limit investment to $500 per investor. We encourage the Commission to explore the reduction or elimination of requirements on individual investments under a certain amount. The adoption of appropriate rules, that do not overly complicate, but support the purpose of Section 4(a)(6), should be aggressively pursued.

18

 

  

II.A.3: Transaction Conducted Through an Intermediary

12. The proposed rules would prohibit an issuer from conducting an offering or concurrent offerings in reliance on Section 4(a)(6) using more than one intermediary. Is this proposed approach appropriate? Why or why not? If issuers were permitted to use more than one intermediary, what requirements and other safeguards should or could be employed?

RocketHub believes that an issuer should be prohibited from using more than one intermediary to conduct a single Section 4(a)(6) offering, or multiple concurrent offerings. Leveraging a single intermediary during an offering will allow for effective sharing of information between committed and prospective investors, and for the “collective wisdom of the crowd” to effect the success of the offering. This significant benefit will only be effective if there is only one intermediary platform being leveraged at a time. However, this prohibition should not affect an issuer’s right to change intermediaries for subsequent offerings.

13. Should we define the term “platform” in a way that limits crowdfunding in reliance on Section 4(a)(6) to transactions conducted through an Internet website or other similar electronic medium? Why or why not?

14. Should we permit crowdfunding transactions made in reliance on Section 4(a)(6) to be conducted through means other than an intermediary’s electronic platform? If so, what other means should we permit? For example, should we permit community-based funding in reliance on Section 4(a)(6) to occur other than on an electronic platform? To foster the creation and development of a crowd, to what extent would such other means need to provide members of the crowd with the ability to observe and comment (e.g., through discussion boards or similar functionalities) on the issuer, its business or statements made in the offering materials?

The Section 4(a)(6) exemption was conceived of as an online exemption, and its fundamentals are based on the growth of online crowdfunding. Offline offerings are inherently unable to leverage the information sharing and crowdsourced review this exemption is designed to maximize. Therefore, Section 4(a)(6) offerings should be required to leverage a web-based platform.

15. Should we allow intermediaries to restrict who can access their platforms? For example, should we permit intermediaries to provide access by invitation only or only to certain categories of investors? Why or why not? Would restrictions such as these negatively impact the ability of investors to get the benefit of the crowd and its assessment of an issuer, business or potential investment? Would these kinds of restrictions affect the ability of small investors to access the capital markets? If so, how?

19

 

  

As described in the first section of this paper, intermediaries should have the right to block and/or restrict certain issuers and investors. For example, an investor with an established history of unfounded abuse in public comments may degrade the productivity of the public forums/comment boards hosted by the intermediary. The ability to suspend or ban problematic users is a staple of web-based business, and must be permitted. Often users notify platforms of such abuses through ‘flags’. Portals should also be permitted, at their sole discretion, to only service certain categories of investors. For example, Portals may only want investors that are located within their town, or state. So long as this selection is not discriminatory, it should be permitted. Portals are a business and, similar to businesses generally, have the right to police the items they offer to ensure compliance with law and judgments of taste.

RocketHub also believes that issuers should have the right to create invitation-only offerings, or only provide certain investors access to their offering. For example, an issuer should have the right to not permit a competitor from investing in the offering through an intermediary. Or the issuer may be looking to raise capital purely from a select group of friends and family, or investors within their town or state. This should be permitted as the limited number of investors reduces the risk that uninformed investors will participate, and is consistent with more standard private placements, where companies are able to select who purchases securities.

II.A.4: Exclusion of Certain Issuers from Eligibility under Section 4(a)(6)

17. Section 4A(b)(4) requires that, “not less than annually, [the issuer] file with the Commission and provide to investors reports of the results of operations and financial statements of the issuer . . . .” Should an issuer be excluded from engaging in a crowdfunding transaction in reliance on Section 4(a)(6), as proposed, if it has not filed with the Commission and provided to investors, to the extent required, the ongoing annual reports required by proposed Regulation Crowdfunding during the two years immediately preceding the filing of the required offering statement? Why or why not? Should an issuer be eligible to engage in a crowdfunding transaction in reliance on Section 4(a)(6) if it is delinquent in other reporting requirements (e.g., updates regarding the progress of the issuer in meeting the target offering amount)? Why or why not? Should the exclusion be limited to a different timeframe (e.g., filings required during the five years or one year immediately preceding the filing of the required offering statement)?

18. Is the proposed exclusion of issuers who fail to comply with certain ongoing annual reporting requirements too broad? If so, how should it be narrowed and why? Should the exclusion cover issuers whose affiliates have sold securities in reliance on Section 4(a)(6) if the affiliates have not complied with the ongoing annual reporting requirements? If so, should this encompass all affiliates? If not, which affiliates should it cover? Should we exclude any issuer with an officer, director or controlling shareholder who served in a similar capacity with another issuer that failed to file its annual reports? Why or why not?

20

 

  

RocketHub believes the reporting and progress update requirements in II.B.1.b are excessive and unnatural for the market that Section 4(a)(6) is intended to faciliate. As such there is a risk that issuers will frequently fall into delinquency, purely due to the regulatory hurdles and requirements imposed, many of which are purely for speculative statistical purposes, not regulating good behavior or a healthy market. As discussed above, the reporting and progress update requirements are estimated to be significant and obstructive in cost.

Instead of simple exclusion, the Commission should consider mandating that an issuer disclose its outstanding failure to comply with reporting requirements in any new offerings. This doctrine should apply to both issuers and their affiliates. RocketHub encourages focused regulation, and automatic exclusion of an issuer from new issuances based only on specific, enumerated failures. This doctrine should apply to both issuers and their affiliates.

19. What specific risks do investors face with “idea-only” companies and ventures? Please explain. Do the proposed rules provide sufficient protection against the inherent risks of such ventures? Why or why not?

The proposed rules do not adequately take into consideration “idea-only” stage companies and ventures. Idea-only endeavors are inherently higher risk ventures, with only limited financial history, or none to speak of. This lack of financial history stands in contrast to the accountant review and audit requirements proposed in the rules. RocketHub suggests that the Commission incorporate rules that acknowledge the fact that idea-only stage, and early stage companies may not have historical financials to audit, and waive the audit requirements for these companies. Such regulations should be limited, however, and aimed at low-cost compliance. Crowdfunding may provide an efficient source of capital for “idea-only” stage companies, helping them grow into small and large businesses.

20. Does the exclusion of issuers that do not have a specific idea or business plan from eligibility to rely on Section 4(a)(6) strike the appropriate balance between the funding needs of small issuers and the information requirements of the crowd? Why or why not? Are there other approaches that would strike a better balance among those considerations? If the proposed approach is appropriate, should we define “specific business plan” or what criteria could be used to identify them? How would any such criteria comport with the disclosure obligations described in Section II.B.1.a.i.(b) (description of the business) below?

Issuers that do not have a specific idea or business plan should not be outright excluded from eligibility to rely on Section 4(a)(6). This question highlights a fundamental misunderstanding around the dynamics of crowdfunding, how the crowdfunding market operates, and the criteria that crowds have historically leveraged to make decisions in perks-based crowdfunding. The crowd should be allowed to decide on these matters, and a clear disclosure should be made to

21

 

  

investors that an issuer does not have a specific idea or business plan. Without a specific idea or business plan, the issuer would likely need to demonstrate other remarkable factors, in order to convince investors to back the offering. If those factors are impressive enough, the investors should be allowed to make their own decision. The JOBS Act’s intent was to help facilitate a new form of capital formation. A paternalistic approach to regulation will hinder the very market the capital is intended to help form.

II.B.1: Disclosure Requirements

23. Under the proposed rules the definition of the term “officer” is consistent with how that term is defined in Securities Act Rule 405104 and in Exchange Act Rule 3b-2. Should we instead define “officer” consistent with the definition of “executive officer” in Securities Act Rule 405 and in Exchange Act Rule 3b- 7? Why or why not? Which definition would be more appropriate for the types of issuers that would be relying on the exemption?

Most companies utilizing the crowdfunding exemption will be small and have limited personnel. The only officers relevant for all purposes under these rules should be the principal executive officer and the principal financial officer, which may be the same person.

24. Are these proposed disclosure requirements relating to the issuer and its officers and directors appropriate? Why or why not? Should we only require the disclosures specifically called for by statute or otherwise modify or eliminate any of the proposed requirements? Should we require any additional disclosures (e.g., disclosure about significant employees)? Is there other general information about the issuer or its officers and directors that we should require to be disclosed? If so, what information and why? For example, should we require disclosure of any court orders, judgments or civil litigation involving any directors and officers, including any persons occupying a similar status or performing a similar function? Why or why not? If so, what time period should this disclosure cover and why?

25. The proposed rules would require disclosure of the business experience of directors and officers of the issuer during the past three years. Is the three-year period an appropriate amount of time? Why or why not? If not, please discuss what would be an appropriate amount of time and why. Should the requirement to disclose the business experience of officers and directors include a specific requirement to disclose whether the issuer’s directors and officers have any prior work or business experience in the same type of business as the issuer? Why or why not?

22

 

  

Listing past business experience can help the crowd form an understanding of the competencies of an issuer’s management team, but may also disadvantage younger generations of entrepreneurs such as recent college or high school graduates. The Commission should not penalize issuers that lack business experience through restriction or mandated time-based disclosure. Issuers should have a choice to list business experience, and best practices will likely encourage them to do so, but issuers should not be required to do so. The Commission should be flexible and allow the market to decide what information is appropriate. The Commission should attempt to adhere to a regulatory approach that allows the issuer and investor to maintain a relationship, without imposing an overly paternalistic influence. Investors can ask about relevant experience and make an investment decision based on the response.

Requiring the disclosure of all court orders, judgments, civil litigation, and other similar matters involving directors, officers or others of a similar status is overly invasive of an issuer’s privacy (and is not required disclosure in other private offerings). RocketHub believes that the Commission should mandate that Portals and issuers disclose certain judgments and events, which judgments and events should be limited to those involving fraud and criminal conduct. Disclosure of such judgments and events (especially crimes involving a financial element) will adequately protect investors without unduly burdening issuers.

26. The proposed rules would require disclosure of the names of persons who are beneficial owners of 20 percent or more of the issuer’s outstanding voting equity securities, calculated on the basis of voting power. Is this approach appropriate? Why or why not? Should the proposed rules require disclosure of the names of beneficial owners of 20 percent or more of any class of the issuer’s voting securities, even if such beneficial ownership does not exceed 20 percent of all of the issuer’s outstanding voting equity securities? Why or why not? Should the proposed disclosure requirement apply to the names of beneficial owners of 20 percent or more, as proposed, or to more than 20 percent of the issuer’s outstanding voting equity securities? Why or why not?

27. The proposed rules would require that beneficial ownership be calculated as of the most recent practicable date. Is this approach appropriate? Why or why not? Should beneficial ownership be calculated as of a different date? For example, should the reported beneficial ownership only reflect information as of the end of a well-known historical period, such as the end of a fiscal year? Please explain. Should there be a maximum amount of time from this calculation date to the filing to ensure that the information is current? If so, what maximum amount of time would be appropriate?

28. Should we provide additional guidance on how to calculate beneficial ownership on the basis of voting power? If so, what should that guidance include? Should the proposed rules require disclosure of the name of a person who has investment power over, an economic exposure to or a direct pecuniary interest in the issuer’s

23

 

  

securities even if that person is not a 20 Percent Beneficial Owner? Why or why not?

RocketHub recommends the Commission keep the regulation as simple as possible, and supports the disclosure of names of persons who are beneficial owners of 20 percent or more of the issuer’s outstanding equity securities (or any class thereof).

Additionally, it is worth noting that not all classes of shares would allow shareholders to block the majority holder from undertaking an offering under Section 4(a)(6). In order to protect future classes of stakeholders, as this new market develops, as well as protect existing investors, the Commission needs to take into consideration that certain classes of shares may have assigned their voting rights, or prior investors may hold convertible notes that only trigger after the offering is complete (in effect holding no outstanding shares at the moment of offering).

Any additional guidance provided by the commission regarding the calculation of beneficial ownership should be structured to allow for simple interpretation and low-cost response. We do not believe the beneficial ownership calculations implementing Sections 13 and 16 of the Securities Act are appropriate models. The requirements on disclosure of beneficial ownership should be so simple that minimal guidance is needed.

29. Are these proposed disclosure requirements appropriate? Why or why not? Should we require any additional disclosures? Should we prescribe specific disclosure requirements about the business of the issuer and the anticipated business plan of the issuer or provide a non-exclusive list of the types of information an issuer should consider disclosing? Why or why not? If so, what specific disclosures about the issuer’s business or business plans should we require or include in a non-exclusive list? For example, should we explicitly require issuers to describe any material contracts of the issuer, any material litigation or any outstanding court order or judgment affecting the issuer or its property? Why or why not?

We agree that the Commission should not specify the information to be included by the issuer in the description of the business or the business plan. The appropriate level of disclosure will be determined by the issuer and investors. This description, however, will not be subject to diligence by the Portal and that Portal should not have any liability for the accuracy of such description.

30. Would more specific line item disclosures be more workable for issuers relying on Section 4A or provide more useful guidance for such issuers? Would such disclosures be more useful to investors? Why or why not? For example, should we require issuers to provide a business description incorporating the information

24

 

  

that a smaller reporting company would be required to provide in a registered offering pursuant to Item 101(h) of Regulation S-K? Why or why not? Should we require issuers to provide information regarding their plan of operations, similar to that required by Item 101(a)(2) of Regulation S-K in registered offerings by companies with limited operating histories? Why or why not?

Specific line item disclosures will not necessarily be more useful to investors. Trying to match crowdfunding issuers with disclosures from Item 101(h) of Regulation S-K should be avoided. Instead the Commission should let the investors determine the necessary information to be provided by issuers.

31. Are these proposed disclosure requirements appropriate? Why or why not? Should we require any additional disclosures, including specifying items required to be disclosed? Is the proposed standard sufficiently clear such that it would result in investors being provided with an adequate amount of information? If not, how should we change the disclosure requirement? Should the rules include a non-exclusive list of examples that issuers should consider when providing disclosure, similar to the examples discussed above?

32. Under what circumstances, if any, should an issuer be required to update the use of proceeds disclosures?

33. Is there other information regarding the purpose of the offering and use of proceeds that we should require to be disclosed? If so, what information? Should any of the examples above be included as requirements in the rules? Why or why not?

We believe that Commission is relying too heavily on a “top-down” approach in this regulation. The Commission should allow the investors to determine the required disclosure through their communications with the issuer.

During annual or quarterly reporting an issuer can disclose use of proceeds information to invested parties only if there was a significant use of proceeds change. Too many disclosures, filings, reports, and forms submissions will create unnecessary hurdles and costs for issuers, who would serve their investors’ interests best if focused on running their enterprise. As such, RocketHub recommends limiting mandated disclosures.

34. Are these proposed disclosure requirements appropriate? Why or why not? Should we modify or eliminate any of the proposed requirements? Should we require any additional disclosures?

RocketHub supports the Commission’s position on simple disclosure of target offering amount and over subscription cap. We also agrees that the Commission should not prescribe how

25

 

  

                                                                                         

     

oversubscribed offerings must be allocated. However, the Commission has included proposed rules on the process to cancel commitments, without requesting comment, and RocketHub has serious concerns with this rescission period policy. It is important that investors have the ability to cancel their commitments within a reasonable time limit. However, the right to rescind, as written in the proposed rules, exposes both the investor and issuer to specific types of fraud and risk, and the proposed rules methodology is in unnecessary excess of the JOBS Act’s requirements.

The Commission’s proposal leaves investors open to considerable risk of “pump & rescind” schemes, An unscrupulous issuer could have fake investors “pump up” the campaign by committing large dollar amounts up-front, in order to create the appearance of momentum, thereby attracting other investors. If the rescission period is too long, those initial investors could slowly “rescind” those investments as new investors join. This amounts to promotion through faux-investing, and should not be permitted.

The Commission’s proposed rules leave issuers at risk of a “short fall”. Investors who are allowed to rescind their commitments to invest, after the campaign has reached the target amount, may cause the campaign to fall short of the target amount. This short fall may jeopardize the entire offering if the issuer does not have enough time to replace the lost investors before the campaign expires.26

RocketHub’s solution, as outlined in our first white-paper, suggests that once an investor expresses intent to invest, his/her investment should be placed in a “pending” state for 24-hours. After that 24-hour rescission period expires, the investor’s funds should transition from “pending” to “committed,” and be held in escrow until transferred to the issuer. However, if the offering does not reach its funding target before the campaign deadline, the investor’s funds should be released from escrow and returned to the investor. A short rescission period will protect investors from “pump & rescind” schemes, and minimize an issuer’s exposure to the risk of “short fall.” As Sec.302(b)/Sec4A.(a)(6) requires a minimum offering period of 21 days, the investor should have enough time to review the investment opportunity before investing. A longer rescission period is unnecessary. As described in the proposed regulations, the Commission allows for a rescission period that is as long as the offering itself; this is unnatural for crowdfunding dynamics. Alternatively, the Commission could also allow different Portals to experiment with their own methodologies for rescission, provided that such methods comply with the parameters established by the JOBS Act.

35. The proposed rules would require an issuer willing to accept investments in excess of the target offering amount to provide, at the commencement of the

26 RocketHub, Regulation of Crowdfunding: Building on the Jumpstart Our Business Startups Act, Pg. 11, http://www.sec.gov/comments/jobs‐title‐iii/jobstitleiii‐39.pdf, May 2012

26

http://www.sec.gov/comments/jobs-title-iii/jobstitleiii-39.pdfhttp:expires.26

 

  

offering, the disclosure that would be required in the event the offer is oversubscribed. Is this approach appropriate? Why or why not?

The proposed rules here are clear and transparent allowing investors to have knowledge of potential changes to their position.

36. Are these proposed disclosure requirements appropriate? Why or why not? Should we modify or eliminate any of the proposed requirements? Should we require any additional disclosures? Please explain.

Please see our response to questions 24-29, above.

37. Are these proposed disclosure requirements appropriate? Why or why not? Should we modify or eliminate any of the proposed requirements? Should we require any additional disclosures? Please explain.

The proposed disclosure requirements go beyond the requirements laid out by the JOBS Act. The regulation should allow for frictionless participation by good actor issuers. Many, if not most issuers, may not be able to demonstrate examples of various methods for how “such securities may be valued by the issuer in the future, including during subsequent corporate actions.”

RocketHub agrees with the Commission in that proposed rules should require disclosure of the number of securities being offered and/or outstanding, as well as the voting rights, limitations on voting rights, and a description of the transfer restrictions, if any. However, we only agree insofar as these requirements do not require additional form submission, accountant or legal work. These additional extensive disclosure requirements, which are not required by the Act, will increase the cost of compliance significantly, and by default will exclude issuers who do not readily have access to tens of thousands of dollars.

38. Are these proposed disclosure requirements appropriate? Why or why not? Should we modify or eliminate any of the proposed requirements? If so, how and why?

39. To assist investors and regulators in obtaining information about the offering and to facilitate monitoring the use of the exemption, the proposed rules would require an issuer to identify the name, Commission file number and CRD number (as applicable) of the intermediary through which the offering is being conducted. Is there a better approach? What other information should be provided? If so, please describe it.

27

 

  

40. Should we require disclosure of the amount of compensation paid to the intermediary, as proposed? Why or why not? Should we require issuers to separately disclose the amounts paid for conducting the offering and the amounts paid for other services? Why or why not?

Regarding CRD disclosure: the Commission must outline the location and method of this disclosure. Additionally, if all offerings must be listed on an intermediary platform and it is not permissible for any offering to be listed on more than one intermediary at the same time, this disclosure is unnecessary.

Regarding compensation paid to the intermediary: the intermediary’s fee may not be calculable at the onset of an offering, since certain components of the compensation may be percentage based. In this case, the Commission should allow for disclosure of the method used to calculate the intermediary’s compensation. In addition, disclosure of fees paid for compliance and overhead should be included as well. Appropriate government overhead should be explicitly stated (accountant, lawyer, background verification, income verification, compliance costs, etc.). Intermediary fees should be able to be broken down as well to highlight the costs spent for compliance, SRO fees, transaction costs, and more. A similar example would be the pricing model that Spirit Airline uses. Spirit breaks down how much of your ticket goes to government fees and fuel. This provides a level of transparency that consumers deserve. RocketHub believes in transparency for its users and strongly recommends that all fees are included.

Regarding material risk factors: RocketHub interprets a discussion of material factors to be a general statement of disclosure that can be made, which does not have to be greater than 500 words in length.

41. Should we require the issuer to include certain specified legends about the risks of investing in a crowdfunding transaction and disclosure of the material factors that make an investment in the issuer speculative or risky, as proposed? Why or why not? Should we provide examples in our rules of the types of material risk factors an issuer should consider disclosing? Why or why not? If so, what should those examples be?

The issuer should be able to use generic language to warn about the risks of investing in a crowdfunding transaction. Requiring each issuer to provide a detailed risk analysis would make legal expenses associated with Section 4(a)(6) offerings cost prohibitive and for small businesses would not be cost efficient (as general business risks would likely outweigh specific risks to the issuer).

42. Should we require disclosure of certain related-party transactions, as proposed? Why or why not? The proposed rules would require disclosures of certain

28

 

  

transactions between the issuer and directors or officers of the issuer, 20 Percent Beneficial Owners, any promoter of the issuer, or relatives of the foregoing persons. Is this the appropriate group of persons? Should we limit or expand the list of persons? If so, how and why?

43. As proposed, immediate family member, for purposes of related-party transactions disclosure, would have the same meaning that it has in Item 404 of Regulation S-K. Is this the appropriate approach? Why or why not? If not, what would be a more appropriate definition and why? For purposes of restrictions on resales of securities issued in transactions made in reliance on Section 4(a)(6), “member of the family of the purchaser or the equivalent” would, as proposed, expressly include spousal equivalents. Should the definition of immediate family member for purposes of related-party transactions disclosure also expressly include spousal equivalents, or would including spousal equivalents create confusion in light of the fact that the definition for purposes of related-party transactions already includes any persons (other than a tenant or employee) sharing the same household? Please explain.

44. Is it appropriate to limit the disclosure about related-party transactions to transactions since the beginning of the issuer’s last full fiscal year? Why or why not? Is it appropriate to limit disclosure to those related-party transactions that exceed five percent of the aggregate amount of capital raised by the issuer in reliance on Section 4(a)(6)? Should we instead require disclosure of all related- party transactions or all transactions in excess of an absolut